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Economy Live
With James K. Glassman
Investing columnist
Wednesday, March 20, 2002; Noon EST
This week's topic is "America's Best Businesses and How to Find Them."
The best stocks to buy are the stocks of America's best businesses. But how do you find the best businesses? The process is not as tricky as you think. Read his latest article "Don't Buy Stocks, Buy Businesses" (Post, March 17, 2002).
Investing columnist James K. Glassman on Wednesday, March 20 at Noon EST, talks about what makes a great business.
Glassman is a resident fellow at the American Enterprise Institute, a Washington public policy think tank, where he specializes in issues involving economics, technology and financial markets. He is also host of TechCentralStation.com, a public affairs Web site that concentrates on matters of technology and public policy.
He also writes a syndicated financial column, which appears on the front page of the business section of The Washington Post every Sunday and is published in other newspapers, including the New York Daily News and the International Herald Tribune.
He is the author of "The Secret Code of the Superior Investor (Crown)," published in January 2002. From 1987 to 1993, Glassman was editor and part-owner of Roll Call, the twice-weekly newspaper that covers Congress. Prior to that, he had a long career in magazine publishing -- as president of the Atlantic Monthly, executive vice president of U.S.News & World Report and publisher of the New Republic.
He has also had extensive television experience - as host of two weekly series, Capital Gang Sunday on CNN and TechnoPolitics on PBS. He has been a guest on ABC's Nightline, CNN's Crossfire, PBS's Charlie Rose Show, CNN's Larry King Show, and others. His articles have appeared in The Wall Street Journal, Reader's Digest, Forbes, the New York Times, the Los Angeles Times, and others.
Below is the transcript.
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James K. Glassman: Welcome. Time for another chat. Rather than gab myself. Let me get straight to the q and a.... -- Jim
Annandale, Va.:
Mr. Glassman:
I enjoyed your piece in Sunday's paper. It appears that the model you were reviewing would not pick up a company for several years after it goes public so that there would be an inherent bias against the technology sector, which, generally, consists of younger companies. Is this true? washingtonpost.com:
Glassman's latest article: Don't Buy Stocks, Buy Businesses (Post, March 17, 2002)
James K. Glassman: Absolutely, the Staton system is biased against tech and against new companies. There is nothing wrong with technology stocks, as I tend to say over and over in my column. In fact, I think tech provides some of the best bargains in the market right now. But there is no denying that tried-and-true businesses that have shown over the years that they can make consistent profits are wonderful investments. My suggestion is to own both, but I would not complain if the bulk of your assets were in Staton-type stocks that have increased dividends and profits every year for a few decades or so.
Harrisburg, Pa.:
Do you have any opinions on whether Compaq should merge into Hewlett-Packard?
James K. Glassman: It's a close call. I am a huge fan of Dell (I own the stock), and Dell has clobbered Compaq and Gateway, especially during this recession. The computer box biz is a commodity biz. So my first impression is that this is an awfully strange thing for HP to do -- buying Compaq. Still, in the end, I would probably vote for the merger. Fiorina is a smart operator, and she clearly sees value in Compaq, and she is getting the co. at a decent price.
Rockville, Md.:
I think your idea of buying businesses, not stocks, is basically correct. However, the risks for losses are still quite high. As you have mentioned in articles, even Enron was given great recommendations by analysts almost until it declared bankruptcy. I have a degree in finance, have worked in the financial industry for over 20 years, and underwritten businesses of all sizes, including publicly traded companies, but there are things that can happen to a company that even the best analyst could not predict -- lawsuits, changes in laws, accidents, dishonest employees, terrorism. Few analysts predicted Enron, although more should have if they had paid some attention to cash flow and other items in the financial statements that were not quite right. Plus, I have never been more nervous than when I recommended a loan to a business that was playing some kind of a shell game with pro forma numbers that I didn't realize until afterwards (it was, thankfully, repaid). Oddly enough, the CFO was a former Arthur Andersen tax partner. Lesson learned: Too many pro forma numbers are usually trying to hide something.
I think asking the average investor with a limited understanding of financial statements to do what experienced analysts can have problems with, and adding to that the unexpected, is too much. Most investors will keep their risks to a minimum with broadbased mutual funds and be able to sleep at night.
James K. Glassman: Well, you won't get an argument from me about the virtues of professionally managed portfolios. Still, remember that Fidelity and Janus each owned about 6 percent of Enron, so the pros can get fooled too. My view is that it is perfectly fine for investors to own only mutual funds, closed-ends and exchange-traded funds, but there is an undeniable excitement and intellectual satisfaction involved in picking winners in the stock market. I also agree that it is tough for small investors to analyze a complicated, global company -- which is precisely why I like the Staton approach. A company like Automatic Data Processing or Wal-Mart, both of which have increased their earnings every year for three decades or more, is clearly a fantastic business. No guarantees, of course, but these are great bets. The only question with them is whether the price is right. As for failures and bankruptcies: don't exaggerate the risk here. They are rare events for S&P 500 cos.
Alexandria, Va.:
The introduction to this interview states "The best stocks to buy are the stocks of America's best businesses."
What if the prices of the stocks of America's best businesses are too high? Might it then be better to buy some speculative stocks?
James K. Glassman: Here is the price question, and it is an important one. No one wants to overpay for a stock, and consistent winners carry high price tags. Most of them those prices are well worth paying. But, yes, speculative stocks are fine to own as well, but not in abundance. I am thinking about buying Amazon, for example, and a number of other tech stocks I think are undervalued. I have no illusions. These stocks are risky, but the payoff will be big. So diversify your portfolio: own mainly solid growers with good track records, but spectulative stocks as well.
Harrisburg, Pa.:
Isn't it nearly impossible to make accurate stock market forecasts? If that was the case, investors would immediately purchase the good stocks and cause their prices to increase until they were no longer a decent investment to purchase.
James K. Glassman: Yes, yes, yes. It is impossible to predict the market. That's why one of the chapters in my new book, "The Secret Code of the Superior Investor," is titled, "Don't Watch CNBC in Broad Daylight." The TV shows, like most newsletters, concentrate on predictions and market timing -- which simply cannot be done successfully. Certainly, if most investors today think the market is going up, then that knowledge is reflected in the market today. What moves the market is NEW news. Stuff that no one knows about right now. The market is not perfectly priced, of course. There are mistakes. But in general, it reflects the knowledge of millions of people with a huge incentive to get prices right. It takes a lot of hubris to think you can outfox it.
Mt. Lebanon, Pa.:
What makes you think there are any good companies worth investing time and money in? The American business culture promotes the likes of Lay, Skilling, and Fastow to lead the likes of ENRON, Firestone, Arthur Andersen, LCM, Chrysler, Waste Management, Sunbeam, Global Crossing, Studebaker, Montgomery Ward, TWA, and all the other "classic American success stories." Business schools are just cranking out the usual suspects who -- believing only in self --aggrandizement and their own Godhood, rise to the top to poison the entire corporate environment and by extension, American society as a whole. What then is the use of expending the enormous effort to find the one or two notable exceptions to "business as usual" to invest in, believe in, and profit by? Thanks much.
James K. Glassman: This is a kind of cynical view, but all too common. The reason I think there are businesses to invest in is simple: the U.S. economy has been growing at 3 percent annually since World War II. It is the strongest economy in the world. It is driven by profit-making businesses. Sure, there are crooks, deceivers and charlatans. I wasn't born yesterday. But there are 8,000 listed companies on the three major exchanges and another 7,000 or so public companies whose stocks you can buy. The vast, vast majority of these companies are run by honest people, and the numbers can be trusted. Some go broke. That's good. It brings new blood into the system, and people learn from the mistakes that are made. The Enron scandal has had a tremendous POSITIVE influence on investors (they now understand the importance of diversification), on companies (they know now that investors reward honesty and punish lying with death) and on accounting firms (which have learned that they will go out of business if they push the envelope too far). NOt only are U.S. stocks great buys, but consider the alternative: Treasury bonds at 2 percent over inflation, CDs and money market funds at 0.7 percent over inflation? Gold, which has been going down for years? Stocks are the place to be if you believe in the U.S. economy, and I do.
Annapolis, Md.:
From what I can see, the economy we have is segementing the population into the wealthy and the poor.
I recently visited the small town in which I grew-up in Virginia in the 1960's. At that time the town was populated with a bank president, businessmen, a mix of industrial employees, truck drivers and a local dentist. The disparity among the income levels wasn't enormous.
That community has long since died. Only the poor remain. Houses are unpainted because the people cannot affort to paint them. The wealthy live in isolated mansions.
I was in downtown Richmond recently. In the 1960s it was an attractive place. The townhomes are run-down with windows broken. It is obvious only the very poor live in the area. It is a mess. This trend cannot be healthy for our country. What has happened?
James K. Glassman: The issue of income and wealth disparity is a complex one. My colleague, Marvin Kosters, has been studying it for years at the American Enterprise Institute. An interesting new study from a Harvard researcher, however, may put a new light on the issue. First, understand that a key component of wealth and income is CAPITAL income; that is, what you earn from your investments. Until very recently, the only people in the U.S. who had investments were the very rich. That is changing dramatically, thanks in part of 401(k) plans. Some 54 percent of Americans now own mutual funds, and the statistics are beginning to show that the capital income they are getting is closing the gap.
So we need to encourage more Americans to own stocks.
There is no doubt, though, that disparity today is greater than in the 1960s. But, more important, income and wealth have vastly increased for all Americans since then.
Washington, D.C:
What can investors do to protect themselves? If you can't trust the professionals, what can investors do themselves to find signals a failing company?
James K. Glassman: Why do you say you can't trust the professionals? Most professionals do a conscientious, highly competent job managing money. Forget the anecdotes and the exceptions and look at the long-term results. Investors can spend time looking for signals of failure -- I wrote a column a while back on the importance of cash flow in showing those signals; check it out in the Washington Post archive. But, truth is, investors don't have to spend their time doing that. They can simply own highly diversified portfolios. Yes, some stocks may go to zero, but others will produce huge gains. Remember that $1,000 invested in Dell in 1991 has grown to $79,000 today. That makes up for a lot of Enrons.
Finally, the best signal that a company is doing well is its dividend. Unfortunately, fewer companies are paying dividends due to our ridiculous tax laws, which tax dividends twice. The best antidote to Enron would be ending double taxation. Call your Congressperson today.
Washington, D.C.:
It appears that Staton's biases in favor of dividends and against short-term earnings gainers provides some protection against accounting and market manipulators like Enron (everyone eventually gets caught). I wonder whether it is these biases that drive the selection of companies away from the money centers, as you note. Maybe the further you are from the investment bankers, the better off you are (although being in Cincinnati did not help Proctor and Gamble much with their derivatives plays). Maybe, more simply, good, solid basic business operations are almost always better than financial engineering in terms of producing strong companies. What do you think?
James K. Glassman: I definitely believe that the farther a company gets from money centers, the better it will do as a business -- all other things being equal. I have not seen research that proves this, but the Staton data are certainly impressive. If I remember correctly, of the 10 companies with the longest histories of increasing dividends and earnings, only two are headquartered in the Midatlantic states, five or six in the Midwest and two or three in the South. None had HQs in California, New York, Texas or Florida. One of my favorite analysts, Elliott Schlang, publishes an institutional research service in Cleveland that concentrates on Midwest companies. Schlang has done extremely well with firms like RPM, DeVry, Stryker and on and on.
Reston, Va.:
Jim,
So what's going on with the economy? Are we recovering or are we still in a hole? Despite the Bush admnistration repeating that the economy is looking good, my colleagues are still getting laid off.
James K. Glassman: The economy is recovering. There is no doubt about that. All the signs are turning up. The recent purchasing managers report was the best in 18 months, unemployment is dropping, employment is rising, retail sales jumped 6 percent in February. This does not, of course, mean that indidividual businesses are not hurting and laying off employees. Clearly, they are. But technology, hardest hit in this recession (in addition to the travel industry as a result of 9/11) is definitely recovering. The bankrutpcy rate has dropped, and many of them are starting to hire again. Yesterday, I gave a talk as part of the Labor Dept's conference for women entrepreneurs. President Bush gave an excellent speech in which he said that we weren't out of the woods as far as the economy is concerned. He's worried, and he should be. He's not crowing. But Greenspan, who is pretty circumspect in these matters, says that the recession is over, and he may start raising interest rates. There is always a chance that the economy will fall off again (a double dip), but I think that chance is remote -- unless there are more serious terror attacks. So, in summary, the economic recovery is for real.
Fairfax, Va.:
Mr. Glassman,
I'm a young novice at this. So, are you saying that it is a bad idea for me to start investing in stocks? Or are you saying that I should invest in stocks of reputable companies? Which reminds me that KMart and Enron were seen as solid companies to invest in.
James K. Glassman: The best time to start investing is when you are young. The question of whether you should be in stocks or bonds or cash can only be answered if you know your goals first. (Let me put in a shameless plug for my new book, "The Secret Code of the Superior Investor," which lays all the details out.) But if you don't need the money for a long time, then, absolutely, you should be in stocks. But you have to diversify -- either by owning lots of stocks or by owning mutual funds.
But there are no guarantees. Stocks are risking, so every once in a while an Enron comes along, and you get wiped out. Which is why you don't own just one stock or even 10 stocks. But while Enron goes to zero, a stock like Intel increases 3000 percent in 10 years. Diversify, diversify, diversify!!
Somewhere, USA:
What is your opinion on venture capitalism?
James K. Glassman: Venture capital is a wonderful thing. It's the money that fuels start-ups. But venture capitalists made some mistakes in the tech boom. Sure, some of them bet on the wrong companies, but, more important, they shoved too much dough in the faces of entrepreneurs (I know that, in my own case as an entrepreneur, having tons of cash at the start would have been the kiss of death; I would have squandered it) and they demanded results too quickly. They may, by now, have learned their lesson. One other point: During the late 1990s, many stocks got listings on the Nasdaq that would normally be "pre-IPO." That is, they were really still in their venture capital stage, so, wittingly or not, many stock investors became venture capitalists. In some cases, their investments paid off handsomely, but in others they lost lots of money. The volatility was extremely high, as it is in the venture racket. But venture capital, in the end, is one of the things that makes the U.S. economy so much better than the economies of European countries and Japan.
Spokane, Wash.:
Mr. Glassman, it seems a lot of Microsoft's competitors are now trying a strategy of private lawsuits to go after the behemoth from Redmond. You follow the tech industry -- what do you think of this as a strategy and as a business practice?
James K. Glassman: It makes me mad as hell that companies like AOL are now filing private lawsuits against Microsoft, slipstreaming behind the work the federal government did (paid for by taxpayers). These companies had ample opportunity to sue Microsoft earlier and avoid the disaster that the federal Microsoft suit has caused to technology in general. AOL has had a terrible time with its merger with Time Warner. That's what its execs should be concentrating on. The problems with that merger -- and the sharp decline of AOL's stock price -- has nothing at all to do with Windows or browsers. It has everything to do with bad choices and bad management. Stick to competition in the marketplace. Stay out of the courts.
Washington, D.C.:
You said you do not think the economy will do a double dip. The Economist has been arguing for some time that a double dip is almost inevitrable and is the real problem. As I understand it, their argument is based on the fact that consumer spending has not yet fallen as much as other elements of the economy, that consumer spending has been maintained at the cost of increased consumer debt, and that when this debt load becomes too big it will drive down consumer spending and caue a second dip. Are you looking at the same data?
James K. Glassman: The Economist -- as representative of the European establishment -- has been envious of the success of the U.S. economy for a long time. Its editors have been predicitng disaster for about a decade now. Instead, the U.S. economy has been incredibly powerful. So now they're saying "double dip." I doubt it. Consumer debt as a percentage of income and wealth is FALLING. It is not a problem. The performance of American businesses and consumers and investors during the past six months has been nothing short of spectacular. The tax cut was part of it. Disposable income has been rising impressively. So has productivity. Barring another terrible terrorist attack, I see a very strong economy going forward -- and, perhaps more important, so does my colleague John Makin, who was one of the most conspicious doomsayers only a few months ago. Lighten up, Economist!
Modesto, Calif.:
Do you think that we are going to see dramatic changes in light of the Enron scandal? Are we going to see any changes in corporate culture (which I personally think is the root to all these problems)?
James K. Glassman: I certainly hope that the Enron scandal will change not only corporate culture but American culture in general. Enron was a moral and ehtical failure, and its roots are in attitudes that anything goes and nothing is sacred. But I believe that corporate executives have gotten the message -- thanks mainly to investors. They decreed capital punishment for Enron, and apparently clients have decreed capital punishment for Andersen. Voltaire said that the English hang an admiral every few years to get the others in line. That's what has happened with Enron, and I hope it has worked. As for legislative changes, we don't need them, and I don't think we will see drastic ones.
Virginia:
Why are fuel and gas prices going up these days?
James K. Glassman: Energy prices are rising for two simple reasons: demand is increasing as the U.S. and world economies recover, and supply remains limited due to the political power of more extreme elements of the environmental movement. But put the prices into context. They have been consistently falling, in inflation-adjusted terms, for decades.
Fairfax, Va:
I heard on the drive to work this morning that we will exceed our debt limit on Monday - so Congress has to vote to increase the debt limit. What impact will this 5 trillion dollar debt have on our ability to sustain economic growth?
James K. Glassman: A $5 trillion debt is a pittance for a $10 trillion economy. Also, $5 trillion is the wrong number since it includes money that one part of the government owes to the other. The debt owed to the public, which is what counts, is only about $3 trillion, or 30 percent of GDP. Imagine that a person making $80,000 a year in income owes total debt, including mortgage debt, of $24,000. Is that too much? Of course not. Our debt is lower, as a percentage of GDP, than any other developed country. The debtis Japan is well over 100 percent of GDP. In fact, I think we should have MORE federal debt, not less.
It is truly an abomination for Democrats (and some Repubicans, too) to resist raising the debt limit. Extremely irresponsible.
Re: Recovering Economy:
Then what do you see for hi-tech employees that were and are laid off? Will there be another increase in hiring?
James K. Glassman: almost certainly, the high-tech sector will revive, with new hiring. But many firms have been chastened, and the new hiring will be slow. IN the longer term, however, the problem for tech will be a LACK of qualified workers to fill slots, not a glut of workers.
Fredericksburg, Va:
Given today's disclosure on the World Bank in the Style section of the Washington Post, should the US continue to support the failing mission of this organization? It appears to be the "Global Welfare System" that has cost billions of dollars and has returned very little from the investment. washingtonpost.com:
Bank Shot (Post, March 20, 2002)
James K. Glassman: I am not a big fan of the World Bank. I am, however, a big fan of the U.S. helping developing countries. The world's greatest problem is poverty: 2 billion people make less than $2 a day. We need to spread the word about free-market capitalism and reward countries that practice it. And we need to end scourges like malaria. I would love to see large sums -- $50 billion would be a good start -- given by the U.S. to fight malaria and help developing nations boost their economies. But the arrangements should be bilateral -- we don't need the World Bank's help, except in a research sense. And the money should go only to "aspiring" nations -- that is, believers in a free-market democratic system and countries that have no toleration for terrorism.
San Diego, Calif.:
As an investor, I am fond of energy companies because I see a growing need for energy consumption down the road in an increasingly technology-based economy. But I'm worried about regulatory uncertainty and a political climate that is hostile to energy producers. What are your thoughts on this?
James K. Glassman: Regulatory uncertainty is definitely hurting the energy business. We need to move swiftly to deregulate utilities and we need to stop deterring oil and gas exploration. Supply is the key! Still, I believe that integrated energy companies like ExxonMobil are good investments (full disclousre: I own the stock). In fact, the current uncertainty, by depressing share prices, means potential bargains.
Virginia:
What about the employment scene in other non-tech sectors? How quickly will they rebound? One concern of mine, is that because of high unemployment there will be an influx of workers taking jobs as they open, leaving those who have been employed during the downturn little opportunity for movement.
James K. Glassman: In general, unemployment is a lagging indicator. That is, it tends to keep rising even after a recession is over. That's what happened in 1992, and it cost George Bush the election. What we have seen in the last two months, though, is declining unemployment, with a peak unemployment in December of just 5.8 percent -- extremely low for a recession peak. So maybe Jan. and Feb. were anomalies. In general, I think that employment will start rising significantly in all sectors within the next few months.
Washington, DC:
More on the general economic outlook: You have now said twice that the one major risk you see to continued economic recovery is a "serious" terrorist attack. How do you define that? Obvously, another atttack that kills thousands of people and disrupts the markets and banking system would be a big problem. But wouldn't it also be a big probelm if two or three suicide bombers blew up themselves and a few civilians at, say, a supermarket or bar? I would think the psychological impact of such attacks would be devastating to consumers and investors.
James K. Glassman: Americans should expect terrorist attacks. That's the simple truth. Could the economy and the country as a whole withstand another attack of the same enormity as the WTC and Pentagon attacks? Of course. Could we survive and prosper even if there were waves of bombings similar to those in Britain and France in years past? Absolutely. In the shorter term, however, attacks of the nature I have just described will have a depressive effect on the stock market and the economy in general. But at this point I think it is foolish for long-term investors to build in such expectations for their portfolios. Still, this is a very personal thing, and the choice is yours.
Georgetown:
Your comparison of the Federal debt to the GDP makes the pernicious assumption that the entire economic product of the country belongs to the government and is available to it. The GDP does not belong to the government, which is gracious enough to let us keep some of it. Rather, the government's share is extracted by threat of force to pay for limited and necessary government functions.
The better comparison is between the current federal budget, which is about $2 trillion and the public debt. In terms of your example, $80,000 in income with $120,000 in mortgage. Still not bad, but without as much room for borrowing as otherwise implied.
James K. Glassman: By no stretch of the imagination is the federal budget debt high. You will have a difficult time finding any economist who thinks so. At $3 trillion in debt, for example, the Treasury is paying about $150 billion in interest to the public. That's 1.5 percent of GDP or about 8 percent of total tax revenues.
Clifton, Va.:
I have seen more vacant stores at Tyson's and Fair Oaks than I can remember since the recession of 81/82. Inflation is back check the price of 6 pack of Pepsi bottles at the Giant.
Tips are down for the dancers at Good Guys and JP's. Is the economy recovering? GDP will jump this quarter because of an increase in inventories. But what happens if no one buys the inventory? Another terrorist hit in CONUS could have an interesting effect too!
James K. Glassman: The desire to believe that the U.S. economy is rotten dies hard. Look, I am the first person to say that in the short term the economy is unpredictable. There are ALWAYS economic problems to which you can point. My view is that the good far outweighs the bad, as it has throughout the past century. But if you think that tips at Good Guys are a leading indicator, so be it. One thing that is happening in this country since 9/11 is that people are getting more serious. Declining tips for exotic dancers may be good for the economy!
James K. Glassman: That's all, folks. It's been fun, and I will be back. IN the meantime, read my column every Sunday, get my book, "The Secret Code of the Superior Investor," and check out my website, www.TechCentralStation.com.
Thanks to one and all. -- Jim
washingtonpost.com:
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